The Trump family used this strategy to save on taxes

Type of trust known as a GRAT reportedly helped the Trumps save hundreds of millions of dollars in gift and estate taxes

Oct 3, 2018 @ 2:30 pm

By Greg Iacurci

President Donald J. Trump and his family supposedly saved on taxes by using a particular kind of trust — a grantor-retained annuity trust, or GRAT.

Just what is a GRAT and why is it used?

At a high level, GRATs are complex vehicles used to transfer wealth in a tax-efficient way. Uber-wealthy families often use GRATs to remove wealth from their estate and transfer it to their children, who inherit that wealth tax-free.

In Mr. Trump's case, his parents transferred properties such as apartment complexes in two GRATs, one in his father Fred's name and the other his mother Mary's name, according to an investigative report published Tuesday by the New York Times.

The Trump family is hardly alone. Other business titans — such as the Walton family of Wal-Mart fame, Facebook CEO Mark Zuckerberg, casino czar Sheldon Adelson and Goldman Sachs chairman Lloyd Blankfein — reportedly have also set up trusts of this type.

Here's how the vehicle works.

GRATs are also known as split-interest trusts. The interest in an asset is split between the original owner (the grantor) and the beneficiary over a set number of years. The transfer can be short term (maybe two years) or longer term (10 or 20 years, for example).

The typical GRAT strategy is to put an asset into the trust that is likely to appreciate greatly in value, according to estate planners. The grantor receives annuity income — a combination of principal plus an interest rate set by the Treasury Department — over the GRAT's term, and the beneficiary receives the remaining value tax-free.

Here's a high-level illustration: The grantor puts $10 million worth of Apple stock into a GRAT with a five-year term and a 3% interest rate. The grantor would get $2 million in principal and $60,000 in interest payments every year for five years. Let's say the Apple stock grew to $20 million over that time. The beneficiary would get a total of $9.7 million ($20 million - $10.3 million) tax-free.

Such a strategy would have saved Mr. Trump and his siblings more than $5 million in taxes back in 1999, when Fred Trump died.

However, there is ample room to game the system — by purposely low-balling the value of an asset, estate planners said.

Let's say the grantor has real estate worth $50 million, but says the asset is only worth $10 million when it goes into the trust. The beneficiary will get a much bigger tax-free transfer in this scenario — roughly $30 million more than in the prior example.

"If you can fudge the value, you're going to leave a big tax-free remainder that passes to your kids," said Richard Behrendt, an estate planning attorney who worked at the Internal Revenue Service for more than a decade.

Indeed, the New York Times investigation found the Trump family was able to dodge hundreds of millions of dollars by "submitting tax returns that grossly undervalued" real estate assets. In one example, the Trumps valued 25 apartment complexes at $41.4 million in 1995; banks valued those same properties at $900 million in 2004, according to the Times.

Charlie Douglas, an estate planner, said there is a risk to using GRATs — if the grantor dies before the end of the trust's term.

"If the grantor dies during the term of the GRAT, the whole thing is brought back into the estate, and I didn't achieve anything for estate-tax purposes when I die," Mr. Douglas said. "The grantor has to outlive the term of the GRAT."

This is often why the wealthy opt for shorter-term GRATs rather than longer ones, estate planners said. Indeed, the Trumps opted for two-year GRATs, according to the Times.


What do you think?

View comments

Upcoming event

Jul 09


Boston Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

Vermont establishes restitution fund for victims of investment fraud

Portion of settlements with financial perpetrators would supply the pool.

10 IBDs with the most variable annuity revenue

Although the popularity of VAs has declined in recent years, some independent broker-dealers still do a good business in them.

Target-date fund design may be wrong for retirees

Researchers suggest the funds don't adequately hedge against sequence-of-returns risk in retirement.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print